In year 1 the price level is constant and the nominal rate of interest is 10 percent. But in year 2 the inflation rate is 6 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must

Question

Quizplus · Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. To maintain the same real interest rate when inflation increases, the nominal rate must also increase by the inflation rate, which is 6 percentage points in this case.

In Year 1 the Price Level Is Constant and the Nominal